Gordon Pape is a well known investing and personal finance guru and author, 2009Tory Zimmerman/The Globe and Mail
In March 2012, I created a high-yield portfolio for readers of my Income Investor newsletter. At the time I stressed that it was designed for investors who were willing to live with a higher level of risk in exchange for above-average cash flow. With one exception (Sun Life) the components of the portfolio are small to mid-size companies. Two are income trusts, four are former trusts, one is a U.S. stock, and one is an Irish-based ADR that trades in New York.
The goal of this portfolio is to provide above-average cash flow. It is best suited to non-registered accounts for three reasons. First, registered plans like RRIFs and RRSPs should not be exposed to as much risk as you'll find here. Second, any capital losses in a non-registered account can be deducted from taxable capital gains. Third, a high percentage of the payments from this portfolio will receive favourable tax treatment in a non-registered account.
Here is a rundown of the securities we own and how they have performed in the seven months since my last review in October.
This fund is the leading operator and franchisor of steakhouse restaurants in Canada and has a substantial presence in select regional markets in the United States. We added it to the portfolio in April 2013 when it was trading at $15.25. As of last October we were showing a small capital loss with the units trading at $15.09. However, they bounced back over the winter to close on May 16 at $15.99 so we have a total return thus far of 11.7 per cent.
This company used to derive most of its revenue from cheque printing but it has successfully diversified into other areas. The stock pays a quarterly dividend of $0.32 per share ($1.28 a year). It has been on a strong run over the past year and the shares are up $5.05 since my October review. That brought the total return to 87.4 per cent in a little over two years, allowing D+H to retain the title of our top performer.
This oil and gas royalty company pays a monthly dividend of $0.14 per share ($1.68 a year). The stock price has slipped by a few pennies since October but that has been more than compensated for by the payments we have received.
TAL International Group (TAL-N)
I brought this shipping container company into the portfolio in October and it turned out to be a bad move. The stock has dropped by $7.14 and not even the generous dividend has come close to making up for that. As a result, we are down done 11.4 per cent, which is clearly not what we want to see.
This Irish-based airplane leasing firm was added last October. It was trading at US$14.39 at the time but has since slipped back to $13.43. However, thanks to the dividends we are close to break-even with a small loss of 1.7 per cent.
Premium Brands Holding Corp. (PBH-T)
This October newcomer has fared better than the other two. The shares have gained $2 and with the dividends we are ahead 13.6 per cent. The company's business is specialty food manufacturing and differentiated food distribution with operations in British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Quebec, Nevada, Ohio, and Washington State.
Morneau Shepell Inc. is the largest Canadian-based firm offering benefits and pension consulting, outsourcing, as well as health management services. It made a nice upward move of $2.61 per share since October. The monthly dividend is $0.065 ($0.78 a year), giving us a total return so far of 55.7 per cent.
Pembina Pipeline Corp. (PPL-T)
This pipeline company made a huge move of $10.90 a share since October, a gain of 32.4 per cent. That made it the second-best performer in the portfolio after Davis + Henderson, edging out Sun Life for the spot. The dividend was recently increased by half a cent to $0.145 a share ($1.74 a year).
This insurance company is the only blue-chip stock in the portfolio and it continues to do well. The shares advanced $2.75 in the past seven months and combined with the $0.32 quarterly dividend we now have a total return of just over 70 per cent.
Chemtrade Logistics Income Fund (CHE.UN-T)
Chemtrade is one of the world's largest suppliers of sulphuric acid, liquid sulphur dioxide, and sodium chlorate. The share price was stagnant for a while but it has been strong recently, topping $22 in March before pulling back to the current level. Distributions are $0.10 per unit monthly ($1.20 a year).
Here's what the portfolio looked like as of the close of trading on May 16. The weighting is the percentage of the market value of the security in relation to the total market value of the portfolio. Sales commissions are not taken into account and the U.S. and Canadian dollars are treated as being at par. Note that the original book value was $24,947.30. The return since inception is based on that amount. We received interest on our cash position of $13.23 during the latest seven-month period.
Comments We've had a good run over the last seven months. At the time of the October review, the total value of the portfolio including distributions was $29,876.18. It is now up to $33,610.39 for a return of 12.5 per cent during the period. This was achieved despite losses from TAL and FLY.
Since inception, we have a total return of 34.7 per cent. That works out to an average annual compound rate of return of 14.72 per cent, which is well above our target range of 7 per cent-8 per cent annually.
Changes TAL International has been encountering some problems lately so we will sell our position now before things get any worse. That will generate cash of $2,213.50 (market value plus dividends). We will use that money plus $12.50 from our cash position to buy 50 shares of Baytex Energy (TSX, NYSE: BTE), which was trading at $44.52 at the time of writing. The stock pays an annual dividend of $2.54 to yield 5.7 per cent.
We will also reinvest some of our accumulated dividends as follows:
KEG.UN: We'll spend $156 in dividends plus $3.90 from cash to buy 10 additional shares, which will bring our total to 160.
DH: We will buy 10 more shares for $320.40, giving us a total of 145.
FRU: We'll acquire 15 more shares for a cost of $364.50. That will bring the total to 140.
MSI: We will use the accumulated dividends of $334.90 plus $0.70 from cash to buy another 20 shares to bring the total to 230.
PPL: We'll buy five shares for $222.90, bringing the total owned to 95.
SLF: We will add five shares for $184.90, making a total of 110.
CHE.UN: Finally, we will buy 20 shares of Chemtrade for $400.40, using all the accumulated dividends plus $10.40 from cash. We now have 170 shares.
Note that these small trades are for modeling purposes only. Do not place small orders with your broker unless you can trade at very low commissions. Where possible, use DRIP programs to add to existing positions or wait until you have accumulated enough cash to make the transaction worthwhile.
Here is what the revised portfolio looks like.
We will invest the cash balance and retained dividends, a total of $535.49, in a high-interest savings account paying 1.35 per cent. I'll review this portfolio again in the fall.
Gordon Pape